International Investment & Financial Flows

1. International Investment & Financial Flows

2. Investment & Financial Flows • How money is invested • Multinational corporations • Where the money flows • Evolution of MNCs • Historical advantages of GN • GS resistance • GS embraces • Changes in production

3. How Money is Invested

4. MNCs

5. About MNCs • Ownership • Plants • Resource extraction • Processing operations • Services • Assets • Capital • Technology • Managerial skills • Marketing skills • Measured in Gross Corporate Product (GCP) • Total value of all goods & services revenues for one year ¤

6. Characteristics of MNCs How would you describe the influence of MNCs? • Lots of $ Lots of power • Transnationality= mobility • Leverage over governments • Locate favorable conditions • Influence jobs growth potential • Promote globalization • Influence culture, values • Promote capitalism & materialism • Influential actors in global system • Offer domestic/ global competition ¤

7. Where MNCs Are: GN • GN has majority of MNCs • Product of post-WWII US hegemony • Top 500 80% GN

8. Where MNCs Are: GS • 73 are China (and Taiwan)= 32% • 28 owned other EE countries = 6% • Only 3 MNCs not GN or EE are petroleum companies= <1% • Colombia, Saudi Arabia, Venezuela ¤

9. MNCs Rival States in Wealth

10. Where the Money Flows

11. Desirable FDI Locations http://www.finfacts.ie/irishfinancenews/article_1026203.shtml

12. Where FDI Goes • Global FDI • 2013: $1.3 T • High point 2007 at $2.1 T • http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf • More FDI goes into which country? • China at $253 B • U.S. with $166 B (#2) • http://www.oecd.org/daf/inv/investment-policy/FDI-in-Figures-Feb-2014.pdf(2012) • Capital flows to EEs est. at $1.268 T in 2012 • http://www.iif.com/emr/capflows201401.php • Map • FDI in China • 20% of EE FDI to China • Within Chinascroll to map, then click on image to bypass log-in • FDI out of US • $351 B v. $62.4 B out of China in 2012 • US single biggest outward flow at 37% of all G-20 FDI • http://www.oecd.org/daf/inv/FDI%20in%20figures.pdf; also see https://www.ofii.org/sites/default/files/FDIUS_2013_Report.pdf ¤

13. China’s FDI Note: Data is cumulative

14. http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/

15. Evolution of MNCs

16. Historical Advantages of GN • Dutch East India Company • Recognized as early form of an MNC • Influenced formation of others • East India Company (British) • French East India Company • US encouraged FDI after WWII • Needed to spark growth in allied countries • Initial resistance by GS • If you’re a GS leader, why would you resist? ¤

17. GS Resistance to MNCs Initial resistance by GS • Newly independent from colonization • Little leverage to institute regulations • Unable to collectively act to institute rules of FDI • Feared exploitation without compensation • Lacked skilled workers for higher-level employment • Repatriation of earnings • Attempted unilateral development ¤

18. GS Embraces MNCs for Development • First in 1960s - into Asia & Central America • Focus on light industry • Set up maquilas / maquiladora as export processing zones (EPZs) in Central America • Late 1970s – into Africa and China • In China, Special Economic Zones (SEZs) • Efforts to entice MNCs • Over 3,000 in over 120 • Still occurring • China raised foreign ownership limit from 20% to 30% • Tesco buys into Star Bazaar Indian grocery chain • 50% ownership • 1st foreign supermarket since gov’t opened grocery sector to FDI ¤

19. GS Embraces MNCs China’s SEZs • 4 in 1980; now have 6 • Model for other countries • Russia • Vietnam • Philippines • India (started with 8) • Cambodia • Authoritarian regimes • Control • Political stability • Concerns about nationalizing ¤

20. GS Embraces MNCs What do you think EPZs have to offer MNCs? • Skilled labor • Stable political environment • Investment incentives, trade concessions • Exemption from domestic laws • Infrastructure • Roads, power supplies, transport facilities, low cost or rent buildings • Waive restrictions on foreign ownership of business • Waive repatriation restrictions ¤

21. MNCs & FDI • What is the investment appeal of Indonesia? • What issues do MNCs encounter doing business in Indonesia? • Why is Cambodia attracting MNCs? • What challenges do MNCs face in Cambodia? • How do Cambodians benefit from FDI?

22. MNCs & FDI MNCs in Indonesia • What is the investment appeal of Indonesia? • Surging domestic market • Auto sales up 17.8% from previous year • Indonesia = biggest SE Asia market • Large population • Sales in India, China on decline • Largely unaffected by 2008 global recession • Investment-grade credit rating • Young labor force = new consumers • New interest from US, EU ¤

23. MNCs & FDI • What issues do MNCs encounter? • Regulatory issues • Corruption • Ranked 114/177 on Transparency Int’l index • Likelihood of bribes to do business 25/28 • Lack of infrastructure • Rising labor costs • Red tape • 80 days for license • Ease of doing business WB ranking very low (120/189) • Argentina- lower at 126 *These factors slow growth • 6 % v. potential 10%

24. MNCs & FDI Moving to Cambodia • Why is Cambodia attracting MNCs? • up 70% since 2011, at $1.5 B, • in 2013 more FDI per capita than China • Limit reliance on China • Increased wages • Younger people don’t want factory jobs • Shrinking labor force • Aging population • Can provide labor for low-tech sectors • Textiles ¤

25. MNCs & FDI • What challenges do MNCs face in Cambodia? • Provides less of everything than China can • Work force • Consumer potential • Electricity access • Limitations  use labor more quickly  higher wages ¤

26. MNCs & FDI • How do Cambodians benefit from FDI? • Wages • Benefits • Medical, accident insurance, education allowances, free lunches • Greater leverage • Strikes for higher wages at Taiwanese-owned paying less than Japanese-owned textile factory • Housing ¤

27. MNCs & FDI What impacts investment decisions? • Political stability • Threat of nationalization • Ease of doing business • Potential consumer market • Infrastructure • Geographic location • Skilled labor • Raw materials • Natural disasters • Health ¤

28. MNCs & Production

29. New International Division of Labor • Global labor shift • Started with US electronics firms • Japan, then SK, China, SE Asia • Expanded • Nike in Japan • Processing raw materials • Semi-finished goods • Components • Finished products ¤

30. New International Division of Labor Strategies • Outsourcing • Using 3rdparty • Offshoring • Foreign party • Suppliers become competitors ¤

31. Issues • Exploits foreign labor • MNCs generally follow set standards • Most pay above local minimum going wage rate • Intra-firm trading • Cheats subsidiary countries of profits • Trade within own set of subsidiaries to avoid taxes • Lower value to pay lower taxes • Not actually selling yet • Export “unfinished” products • Profit is credited to parent company at home • Inflates trade statistics • Diffuses responsibility ¤

32. RanaPlaza • April 24, 2013; 1,127 died • Worst disaster in history of garment industry • Substandard materials, violated building codes, structural flaws • Workers threatened with being fired • Primark retail- paying out $12m • Hope others will follow suit ¤

33. Rana Plaza What questions are raised about who is responsible in the new int’l division of labor regarding the Rana Plaza accident? • MNCs instituted ‘codes of conduct’ but often go unenforced • ‘Ritual compliance’ checks • Corruption • Lack of int’l pressure • Gov’t fears regulations might drive out MNCs • Ethical obligation of MNCs, consumers • Consumer awareness/ apathy ¤

34. Rana Plaza What is the impact of flexible supply chains? • Short product shelf-life • Ramp up, shut down production • Affects job availability; increased shift hours • Workers rarely have contracts • Small profit margins for GS factories • Poorly run, managed factories • Little to reinvest to improve conditions • Safety not a priority • MNCs have leverage • Product on time or you don’t get the next order ¤

35. Production Chains 3 Types Production Chains#1 Product Specialization • One product for regional market • NAFTA: ingredients in English, French, Spanish; measurements standard and metric • EU: ingredients in many languages ¤

36. Production Chains #2 Host-Market Production • Production for one national market • Effective for big market countries • US, China, Brazil, India • Market country’s consumer preferences ¤

37. Production Chains #3 Transnational Vertical Integration • Gap between producer- where goods sold • Parts, final product from different places • Output of one plant goes to one + to complete ¤

38. The Next Fashion Craze

39. Return Home? • Why did MNCs offshore/outsource production? • Why are MNCs considering--or even initiating-- reshoring? • In what ways could reshoring impact the global economy? ¤

40. Return Home? • Why did MNCs offshore/outsource production? • Lower cost • Labor, other overhead, tax incentives, etc. • Good supply chain in place • Offers influence over other countries • Potential consumer markets • Capital needs to find new markets for investment • Growth in global economy benefits domestic economy ¤

41. Return Home? • Why are MNCs considering--or even initiating-- reshoring? *Various figures about returning • Comparable costs at home • Unions less of issue • Rising transport costs • Lower energy costs • Unhappy with abroad labor • Complain, diff. to fire, have/exercising more rights, lower worker quality, fewer workers • Closer to headquarters • Tech better • Image- providing jobs at home • Requires consumer support to buy American- likely? ¤

42. Return Home? • In what ways could reshoring impact the global economy? • Face skilled labor shortage in US • Less FDI going abroad = fewer global consumers • GS depend on FDI for development • Non-EEs most to lose • EU MNCS outsourcing w/in EU- different situation ¤

43. Recap • How money is invested • Multinational corporations • Where the Money Flows • Evolution of MNCs • MNCs & Production